ELITE ADVISOR BEST PRACTICES

Understanding Your Clients from the CPA’s Perspective

2015 tax season uncovers opportunities for savvy advisors

Key Takeaways:

The 2015 tax filing season went smoother than expected, despite over 500 tax changes that impacted 2014 tax returns.

The IRS’ budget decreases, staffing shortages and late release of forms combined with general staffing shortages within the tax-preparation industry added to the preseason angst.

Clients were somewhat more optimistic than in recent years about the underpinnings of the U.S. economy. However, concerns about China’s slowing economic growth, Europe’s financial issues and expanding terror threats weigh on business owners and investors.

Clients continue to be plagued by high net capital gains and the federal alternative minimum tax AMT.

Property owners and businesses are taking advantage of the liberal repairs and maintenance regulations and are ordering cost segregation studies.

While few enjoy paying the government, savvy advisors know that successful tax mitigation is just as important to clients as are brilliant strategies for investing their money wisely, protecting and transferring their wealth efficiently and furthering their charitable goals. Viewing your clients through the CPA’s lens can yield valuable insights about what’s keeping them up at night and help you shine the next time you talk to them about growing, protecting and transferring their wealth.

2015 tax season

April 15 this year represented the completion of my 35th tax filing season in public accounting. I am happy to say it was one of my smoothest tax seasons ever—a welcome respite after two very challenging filing seasons in 2013 and 2014.

Since our firm does slightly more business (versus individual) consulting and compliance, April 15 is really just the second of many statutory deadlines (following the corporate March 15 filing deadline) that stretch throughout the year. Furthermore, since most of our individual clients have fairly complex financial structures, more than 50 percent of them extend their filing deadlines (for up to six months—until October 15).

Most public accounting industry observers had predicted a very chaotic tax season due to various IRS budget issues and delays in producing 2014 tax forms. However, thanks to our management group spending many hours focused on ways to streamline and speed up the tax return process well before the crunch began, we had various means to counteract these challenges. The makeup of our client base also reduced our exposure to some of the messier Affordable Care Act, or Obamacare, tax issues experienced by smaller firms.

Clients were contacted earlier than in prior years and were encouraged to get their tax data in as soon as possible (even if they were still missing a few items). We also accelerated certain work into January and February, such as filing for extensions we knew would be needed. That freed up staff and administrative time in the more critical March and April time frames.

While tax-processing software, optical readers and other technological advances over the past four decades have certainly improved certain aspects of the tax compliance process, other factors played a significant role in how this tax season played out:

There were over 500 federal tax changes last year.

The federal Affordable Care Act began impacting individual returns.

There was a national public accounting staffing shortage in most firms.

Budget constraints and layoffs within the IRS added more complexities to an already hectic period.

Some of the trends we noted this year included:

A bit more optimism within our client base regarding the underpinnings of the U.S. economy. However, concerns about China’s slowing economic growth; Europe’s financial issues, particularly Greece’s; and expanding terror threats are wildcard concerns for business owners and investors.

In general, clients other than those in the oil industry saw positive trending in revenue growth and profitability.

Companies and individuals continue to benefit from cheap money and low interest rates and used these funds for expansion and refinancing.

Partly due to low borrowing costs, we saw a fair amount of company purchases, sales and restructuring activity with respect to private companies during 2014, and our client base also has a reasonable level of 2015 transaction activity already.

The issuance deadlines for 1099 and other tax reporting forms, which are normally required by January 30, continue to slip into later months, and it has been common the past few years to get multiple amended 1099 reporting from brokerage firms—some as late as April.

We saw a high proportion of clients with relatively high net capital gains (mainly long-term), a very high percentage of dividend income qualified for the lower 20 percent tax rate and a majority of interest income came from federal and state tax-exempt bonds.

The vast majority of our clients were in federal AMT positions again in 2014. This was generally a result of California’s high tax rates, which skews federal itemized deductions higher, along with having a mix of long-term capital gains and “qualified dividend” income, which reduces “regular” tax—thereby increasing exposure to federal AMT.

Exposure to state-level AMT is rarer, since California does not allow state tax deductions, nor does it have a lower long-term capital gain rate.

The last-minute (December) congressional extension of the 50 percent Bonus Depreciation and IRC Section 179 Asset Expensing provisions offered many companies a windfall and overpayment positions since earlier estimated tax payments were made, assuming these provisions would not be extended.

Property owners, lessees of real estate and other capital-intensive businesses generally benefited from the more liberal repairs and maintenance regulations and the various elections for expensing and capitalizing certain repairs and improvements. Many clients secured cost segregation studies to optimize the benefits and establish baselines for future years. The cumulative “catch up” tax benefits from the cost segregation analyses and the repairs and maintenance rules were significant—in some cases producing million-dollar deductions—for some taxpayers.

Because of the high federal individual marginal tax rates—39.6 percent plus the potential 3.8 percent Net Investment Income Tax—we discussed with clients the short- and long-term tax efficiencies (or inefficiencies) of their current entity structures versus alternative structures. We also reviewed their entity structures in light of the potentially lower estate and gift tax rates, which currently max out at 40 percent. Therefore, certain appreciating assets may be better off staying in the estate and getting stepped up to fair market value upon the decedent passing. See my earlier article about entity choice.

Conclusion

I know that many firms struggled through the busy 2015 tax season if they had a high concentration of clients impacted by the Affordable Care Act--especially since the IRS issued erroneous information to tens of millions of taxpayers. Fortunately, only a small portion of our clients were impacted by that government snafu. In order to continue the smooth year, we will be onboarding additional employees in all nine of our offices in the coming months to handle our double-digit growth, as well as the extended returns.

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About the Author

Blake Christian, CPA/ MBT is a Tax Partner in the Long Beach office of California-based Top 50 CPA firm HCVT LLP. Blake has over three decades of experience and specializes in corporate and high net-worth individual income, estate and gift tax planning. Blake is a frequent speaker and author and is a thought leader in best practices for professional service firms.